Daiwa To Merge With Rival, Create 2nd-largest Bank

Move To Join Sumitomo Follows

Indictment, Order To Close In U.s.

November 04, 1995|By John Schmeltzer, Tribune Staff Writer.

Japan's Daiwa Bank Ltd., indicted on criminal-fraud charges and ordered to shutter its U.S. banking operation, and its crosstown rival Sumitomo Bank Ltd. have agreed to merge next year, it was reported Saturday by the Japanese press.

Osaka-based Sumitomo, the world's fourth-largest bank, with more than $500 billion in assets, will emerge from the merger with more than $800 billion in assets, creating the world's second-largest bank. Sumitomo said it may hire some of Daiwa's U.S. employees, including some from Daiwa's Chicago branch.

The announcement came as Daiwa and Japanese regulators sought to contain the fallout from Thursday's indictment. The charges highlighted the frailty of the Japanese banking system, which is struggling to shed some $500 million in problem real estate loans.

Daiwa's executives were accused of directing a cover-up of $1.1 billion in bond-trading losses by a trader who in a July 21 letter confessed to bank officials that he'd been losing millions of dollars for more than a decade.

The order forcing Daiwa's shutdown in the U.S. within 90 days caught Daiwa and Japanese regulators by surprise. While U.S. regulators in 1991 had shut down the Bank of Credit and Commerce International, BCCI, they hadn't taken such extreme measures against American brokerage companies Salomon Brothers Inc., Kidder Peabody & Co. Inc. or Prudential Securities, which had been accused of defrauding customers.

But regulators here pointed out that rules differ for banks and securities companies.

"If an Illinois bank had done this, it would have been shut down the next day," said Richard Luft, Illinois banking commissioner whose office is cooperating with the Federal Reserve in monitoring Daiwa's shutdown.

Brokerage companies are subject to regulations by the Securities and Exchange Commission, which has extensive powers to regulate business but doesn't conduct bank-type examinations of the securities firms.

And U.S. banking regulations have been tightened in recent years due to the savings and loan scandal of the 1980s that has cost taxpayers $180 billion.

"My guess is they (Fed officials) were trying to head off anything else," said a regulator for another federal banking agency, noting that Japanese banks have been paying a 0.25 percent premium to borrow funds on the world market because of the condition of their banking system.

But he also said Fed officials ordered Daiwa out of the country because they were embarrassed that their colleagues at the Federal Reserve Bank of New York had failed to detect the fraud.

But Donald Jacobs, dean of Northwestern University's J.L. Kellogg Graduate School of Management, noted that federal officials needed to send a message because money now moves so quickly across borders.

"That's the scary part of it. The amount of money that can be moved with the click of a button is staggering," he said.

Daiwa's American bank operates 15 branches and is primarily a lender to middle-market companies and corporations. Daiwa also runs a trust bank that manages assets for institutional clients.